SBUX » Topics » Tax Deductibility of Executive Compensation

This excerpt taken from the SBUX DEF 14A filed Jan 22, 2009.
Tax Deductibility of Executive Compensation
 
Section 162(m) of the Internal Revenue Code prevents us from taking a tax deduction for non-performance-based compensation in excess of $1 million in any fiscal year paid to the chief executive officer and the three other


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most highly compensated named executive officers (excluding the chief financial officer). We refer to these executives as the “Section 162(m) covered executives.” In designing our executive compensation program, we carefully consider the effect of Section 162(m) together with other factors relevant to our business needs. We design annual incentive and long-term performance awards to be tax-deductible to Starbucks, so long as preserving the tax deduction does not inhibit our ability to achieve our executive compensation objectives. We will pay non-deductible compensation when necessary to achieve our executive compensation objectives. The tax deductibility under Section 162(m) of fiscal 2008 executive compensation is as follows:
 
Base Salary.  The fiscal 2008 base salary paid to the individual executive officers covered by Section 162(m) is fully deductible under Section 162(m), except for $128,997 of the salary paid to Mr. Schultz.
 
Annual Incentive Bonus.  The Executive Management Bonus Plan, as in effect during fiscal 2008, was designed to enable at least 80% of the annual incentive bonuses paid to Messrs. Bocian and Coles and Mr. Burrows (for part of the year) and 100% of such amounts paid to Messrs. Schultz and Donald to qualify as performance-based and therefore be deductible under Section 162(m). We believe it is important for the executive team below the chairman, president and chief executive officer to have individual performance bonus goals in order to drive specific behaviors and business initiatives, even if it means a portion of their bonuses will not be tax-deductible. There were no bonus payouts under the annual incentive plans for fiscal 2008 performance.
 
Stock Options.  Stock options granted to the covered executive officers are designed to qualify as Section 162(m) performance-based compensation, and any gain upon exercise of the options should be fully deductible under Section 162(m).
 
Other Compensation.  Other compensation paid to the Section 162(m) covered executives that is not considered “performance-based” under Section 162(m) is not deductible to the extent that it, together with other non-performance based compensation such as base salary, or discretionary bonuses, exceeds $1 million in any fiscal year. For fiscal 2008, these amounts included a total of $262,028, composed of Mr. Schultz’s imputed income of (a) $14,274 related to passengers on personal flights using corporate aircraft (federal tax rules require imputing income despite Mr. Schultz’s reimbursement of our aggregate incremental cost of those flights), (b) $11,504 for life and long-term disability insurance premiums paid by Starbucks and (c) $236,250 payment to replace a split-dollar life insurance benefit formerly provided to him, as more fully explained on page 34.
 
Tax Deductibility of Executive Compensation
 
Section 162(m) of the U.S. federal tax code prevents us from taking a tax deduction for non-performance-based compensation in excess of $1 million in any fiscal year paid to the chief executive officer and the three other most highly compensated named executive officers (excluding the chief financial officer). We refer to these executives as the “Section 162(m) covered executives.” In designing our executive compensation program, we carefully consider the effect of Section 162(m) together with other factors relevant to our business needs. We design annual incentive and long-term performance awards to be tax-deductible to Starbucks, so long as preserving the tax deduction does not inhibit our ability to achieve our executive compensation objectives. We will pay non-deductible compensation when necessary to achieve our executive compensation objectives. The tax deductibility under Section 162(m) of fiscal 2007 executive compensation is as follows:
 
Base Salary.  The fiscal 2007 base salary paid to the individual executive officers covered by Section 162(m) is fully deductible under Section 162(m), except for $130,358 of the salary paid to Mr. Schultz.
 
Annual Incentive Bonus.  The Executive Management Bonus Plan, as in effect during fiscal 2007, was designed to enable at least 80% of the incentive bonuses paid to Messrs. Coles, Casey and Alling and 100% of such amounts paid to the chairman and the president and chief executive officer to qualify as performance-based and therefore be deductible


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under Section 162(m). We believe it is important for the executive team below the chief executive officer and the chairman to have individual performance bonus goals in order to drive specific behaviors and business initiatives, even if it means a portion of their bonus will not be tax-deductible. Bonus payouts attributable to achievement of individual performance goals did not cause any covered executive’s non-performance based compensation to exceed the $1 million limit under Section 162(m) for fiscal 2007, and those payments were fully tax-deductible.
 
Stock Options.  Stock options granted to the covered executive officers are designed to qualify as Section 162(m) performance-based compensation, and any gain upon exercise of the options should be fully deductible under Section 162(m).
 
Other.  Other compensation paid to the covered executive officers that is not considered “performance-based” under Section 162(m) is not deductible to the extent that it, together with other non-performance based compensation such as base salary or discretionary bonuses, exceeds $1 million in any fiscal year. For fiscal 2007, these amounts included a total of $358,339, comprised of Mr. Schultz’s (i) imputed income of (a) $117,366 for the value of personal secretarial assistance provided by Starbucks, (b) $39,818 related to passengers on personal flights using corporate aircraft (federal tax rules require imputing income despite Mr. Schultz’s reimbursement of our aggregate incremental cost of those flights), and (c) $8,163 for life and long-term disability insurance premiums paid by Starbucks, and (ii) $192,992 payment to replace a split-dollar life insurance benefit formerly provided to him, as more fully explained on page 27.
 
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